The $430 resistance on bullion has been in place for 15 years. It has acted as a huge impediment to further long term upside progress. The whole of the 15 year churning under the $430 resistance is an absolutely massive base that is only just starting to lift off. The recent churning around $418 is merely the hoof stamping of the bull prior to the real charge.
I do not expect to see a serious reaction at $430 but rather a sudden slice right through this 15 year critical level. The bullion price has more than enough base build up to support a major charge above $430 through to at least $485.
The upside moves of the gold shares over the past few weeks has merely been the first signs of breakout from the large correction that started in April 2002. This correction, as I have so often indicated, was the 1-2 in Elliott counting. That means we have entered wave 3 that by reputation is considered by most Elliott analysts to be the biggest wave of all. I have continuously detailed that wave three MUST go well above wave one. This means that the JSE Gold index will move to all time new highs and that even the most pariahed of all gold stocks, Durban Deep, will also move well above its high of April 2002.
There are several investors concerned about a new trauma with Durban Deep and its supposed de-listing from the JSE. The situation is merely that Durban Deep, fed up with local labour and potential Mining Charter restrictions, will seek to have its main listing moved to Australia or the US with only a secondary listing remaining on the JSE. This is effectively a method of telling the local unions to go to hell. I do not expect Durban Deep to de-list from the JSE.
So much for all the Durban Deep doubters that sent me the loads of hate mail in August and September dictating that in their view this was the worst possible gold stock whose price would never rise and that there was so much wrong with the management it was impossible to ever rectify the situation. Well the share price has risen 35% in the past month and is ready for a much higher level. But the main aspect of this stock is the fact that it has started to outperform the JSE Gold index. Stocks do not have superior performance against a major index if they are in trouble or going bust!!
In the meantime the resource stocks, as expected, continue to be the market leaders. I continue to look for the metal, resource and gold stocks to lead the market for quite some time. This is a resource market. I remain concerned at the ridiculously high levels of the retailers. The higher they go the more bubble like they become. I maintain that at current levels there is no technical value in these crazily overbought stocks. Astute investors will have already switched into the resource sectors with the positive relative strength data. Stay with the golds and resources stocks for the next major run.
ANALYSIS
I have constantly detailed the reverse head and shoulders pattern on the Rand price of gold.
I have regarded this chart as the most important gold chart for some time. The upside count out of this picture is to R3200. That will really set the local South African gold shares flying, especially Durban Deep.
This is a very bullish chart and remains the most important gold picture.
ANALYSIS
The chart of the $ gold price has the 15 year resistance at $430 clearly marked. The whole point about this chart is that all the trading under this resistance is a massive flat top broadening base.
The movement back up to test the resistance level is merely just the completion of the base.
We are only now about to start the real long term bull market.
ANALYSIS
The price of gold in Yen is anUnlikely chart for discussion. But I have previously detailed this data as it has a massively important long term resistance at 45000 yen.
This in itself is not of intrinsic importance but it is a powerful signal that the gold price has already broken above a major long term resistance on another leading currency so that the $430 break will not be far behind.
I am still being inundated with penny gold stocks propositions that are primarily from marketing agents and brokers wishing to sell stock. I am happy to include any stock that fits our benchmarks but please do not include reams of fundamental data extolling the virtues of the stock.
Well bullion has finally smashed above the $420 level. This is the start of the main attack on the $430 15 year resistance level. But what is of considerable interest is the confirmation of the catching up of the more marginal mines with the bigger producers that have dominated the first stage of this new bull market. Anglogold (AU) is one of the largest heavyweight gold producers in the world. I start to worry when this stock begins to outperform the JSE Gold index in South Africa as in a true bull market it should under perform. For the past two years it has been performing at a better rate than the overall gold index. But during the past month this whole picture has started to reverse and it is now underperforming the index. I am happy with this situation as it confirms that there is a true gold bull market in progress and also that the more marginal mines are playing catch-up by performing at a better rate than their heavy weight cousins.
During August and September I was hammered from every quarter for my insistence that half of the data published for US investor consumption pertaining to Durban Deep was a load of rubbish. Well this stock is now really starting to move and leave the doubters standing gaping in its wake.
Let me put the whole gold market into perspective as it is essential to have the long term trends in place when one is trading the more volatile stocks. It is my contention that bullion is NOT going back to test the $360 level as so many other analysts have been detailing. It is also my contention that we have entered the next phase of the major long term bull market in precious metal stocks and that this is NOT just a minor rally prior to a serious correction. There is too much ancillary data that confirms the move into the new bull trend. Facts such as the performance of the marginal mines versus the heavyweights and the gold shares outperforming the metal price all contribute towards confirming that a new bull trend has started.
The performance swing towards the marginal producers and away from the heavyweights is the ideal time to start a penny stock portfolio. The surf is in your favour and the sun should shine on the smaller miners and developers. Many exploration and developers only really start to run once the gold price has moved into top gear and the value of their mining rights begins to closer reflect the value of the underground gold deposits. This assumes that the drilling results are realistic and not debatable.
I must reiterate that diversity is an essential element of most investment but an absolute must in a penny stock portfolio. You may not achieve the spectacular returns of putting all your nest egg into one winner but you will achieve a considerable return by spreading risk across the mining spectrum.
The model portfolio has performed admirably in its first three weeks. The US and Canadian stock selections are up an average of 12.4% and the Australian selection up 5.80%. Surprise, surprise, my number one selection, Durban Deep, was the TOP performer, up a massive 26%!! So much for the negative experts and doubters!! I will continue to analyze the various portfolio stocks and any additions or removals in a separate section of the newsletter as access to the constitution and alterations to the portfolio is for the sole prerogative of subscribers.
Let's start with the FT Gold index vs the $ gold price. In the first page discussion I detailed that it is essential for the shares to outperform bullion in a true bull market. Well just look at the FT Gold index. I use this index as it is the broadest based index of global gold stocks. In the 1995 to 2000 bear trend the FT Gold underperformed the gold price. But since 2001 it has continued to outperform the gold price. There has been a revival of performance over the past three months that should continue going forward.
The price of Silver has started to move upside strongly. I detailed that the sudden downside crack at the beginning of this year would be quickly rectified. My data indicates that there is a huge base pattern with the grouped oscillator buy in 2001. Since then there is no indication of any long term sell signal. In fact the oscillators indicate a further major upside potential. I continue to like the silver price above all other precious metal investments.
The silver to gold ratio is shown in the top frame with the silver price in the bottom frame. I have often referred to this chart and stated that the silver price was likely to out perform the gold price in the next bull phase. The rising line indicates that this is well and truly in progress.
I rate silver stocks on any pullbacks as superb buys. All my data indicates that this is a LONG TERM BULL market that should last for at least the next 18 months. Strap yourself in and go for the ride.
'Gold & Silver Penny Stocks' is the sister publication to 'Gold Action' and is produced by Dr. Clive Roffey.
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Dr. Clive Roffey
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9 October 2004